Small Scale Private Equity: Demand Versus Supply

Abstract

Pecking Order Theory predicts that corporate managers seeking external funding would preferentially use debt before equity (Myers 1984; Myers & Majluf 1984). Contrary to this expectation, our results suggest that a significant percentage (20% of generic SME and 29% of high growth firms (HGFs) respondents) of Australian small and medium-sized enterprises (SMEs) prefer equity funding to debt and would seek equity funding, if it were readily available. In exploring the supply side of small scale private equity (SSPE), our study reveals a mismatch between supply and demand, with supply being virtually non-existent, especially for those SMEs categorized as HGFs. In order to attract investment from PE firms, SMEs need to meet stringent criteria and our study found that only 1-2% of these firms have any chance of qualifying.

Keywords: Small Scale Private Equity, SMEs, High Growth Firms, Pecking Order Theory

JEL Classification: G32,G34